Monetary Policy in China - Coursework Example

Monetary policy in china Executive Summary The financial system of China is mostly dominated by the banking sector and the economy of China is considered as one of the largest economy of the world. The two domestic stock exchanges of china are the Shenzhen stock exchange and the shanghai stock exchange which were established in the year 1990. The financial system of China is highly developed. But china has experienced a slow economic growth in the 1st quarter of 2015. The government is required to adopt adequate measures restricting the further fall in the growth rate of the economy. But despite of the slow economic growth, China is considered as one of the fastest growing economy of the world. The money market of China is considered as an indicator for funding to the financial institutions and to the smaller banks existing in the economy. Introduction The financial system plays an important role in the growth and expansion of China. The economy of china is being considered as the second largest economy of the world. The financial system of China is mainly dominated by the banking sector. The banking sector contributes more than three fifth of its credit to the private sector. The main source of the economic growth of China is from the banking sector. The financial system of China has also undergone modifications with the end of monopoly in the banking sector of the country. The banking system of China mainly constitutes two third of the financial asset of the financial system. The financial intermediaries’ plays a crucial role in the financial system of the country. The four state owned banks of China mainly dominate the market. The household savings are conducted by the financial intermediaries under the pressure of the government of China. The monetary policy of China is very complex. In order to facilitate the growth and development in the economy, the Central bank of china has invested cash in the financial system. The interest rates this country are almost zero therefore the central bank of the country has to switch to lower funding cost. Articles Summary The article reflects on the economic growth of China. China is experiencing a slowdown in the economic growth and development in the recent years. The growth has decreased to more than 7% in the first quarter. China has been experiencing a slowdown in its economy since 2009. But it has gained momentum in the recent years. This situation has created more pressure on the Central bank of the country to ease its fiscal and monetary policy. The cut in the interest rate has affected the liquidity position of the economy which has influenced the downturn in the economy. The industrial production of the country has also decreased to5.9 % whereas it was expected to increase by 6.9%. The main reason of economic downturn in China is due to the overcapacity of the factory, increase in the debt burden and economic downturn in the property market of China. The measures adopted to protect the property sector, bank reserve requirements and the series on interest cut in the economy has not supported the revival of the economic condition of China. The Gross Domestic Product of the country is 7% decreasing from 7.3% in the 4th quarter of 2014. Figure 1: Trend of growth rate in China (Xinhua, 2015) The above figure represents that the GDP trend has declined from 2013 to 2015 and it has declined significantly in the 1st quarter of 2015. The GDP in the 1st quarter amounted to 14.07 trillion Yuan and an industrial output growth of around 7.9% which signifies that the output has grown to 6.4% which has decreased from 8.7% growth on yearly basis. The economy has experienced a slowdown in its export in the 1st quarter of 2015 and the retail sales of the country has also decreased which has resulted in the slowdown of the economy (Yao and Qing, 2015). The diminishing growth off the economy in the 1st quarter of the present year has insisted the economy in boosting the spending on infrastructure, reducing the tariff on electricity and the interest rate is required to be cut twice and reducing the cost of borrowing of the companies in China. The sudden slowdown in the economic growth of the country has created a panic in the economy. In spite of the downturn in the economy it in being considered as the global growth driver. The 10$ trillion economy of China is five times larger in terms of its current exchange rates as compared to the exchange rates of the other countries. The economic slowdown in the first phase of the current year has compelled the policy makers and the government to introduce more stringent measures for recovering the economy from economic downturn. The figure is disappointing for china but the figure is still high as compared to other developed countries of the world. But it has been treated as a, matter of concern for china because they have set a minimum target of 7%. Articles Analysis The growth rate in China is measured in terms of its GDP and this estimates the adjusted value of the goods and services that is produced by the economy of China during its 1st quarter of 2015. The economy of China is considered as the second largest economy of the world nest to United States. During the last 30 years the economy of China has experienced a lot of change and modification in its financial system. The economy has focused more on market oriented economy which experiences a rapid growth in its private sector. Figure 2: GDP growth rate (Trading economics, 2015) The above figure represents that China has been experiencing a GDP of 7% in the 1st quarter of 2015. The GDP growth rate has been averaged to 9.06% from the year 1989 to 2014 The Central bank of the country has initiated to reduce the 25 basis point to 2.25%. By decreasing the interest rate in the economy the government initiates lending to the businesses and thereby creating a momentum in the economy. The government has set a target of 7% but the policy makers are concerned about the decline in the growth rate. The decline in the growth rate by more than 7% will create disruptions in the economy. The fixed asset of the economy has expanded to 13.5% as compared to the estimated figure of 13.8% and the retail sales have expanded to 10.2% against the expected figure of 10.9%. The overall economic situation of china is not very favorable since it is facing heavy pressure and economic downturn and therefore it is required that the government to ease its monetary as well as fiscal policy since the policymakers has predicted that the growth rate can fall below 7%. The government has initiated in relaxing the monetary policy by cutting the interest rates The main reason for the economic downturn of China is that it has encountered many challenges and swings in its business cycle trend. In the long run the economy of China is likely to face problem related to changes in labor, productivity and capital. When these factors are favorable it results in the growth and development of the economy. But in the present years these factors are slowing down which has resulted in the slow economic growth of china. The working age population of China has decreased as compared to the previous years and the technological gap that existed with the rich countries of the world has also decreased which indicates that the productivity of the country will fall in the long run. The total debt of the country which comprises of the corporate, household and government has increased by more than 250% of the Gross domestic product which has led to the situation of global financial crisis in the economy. The financial crisis has increased the debt burden in the economy. The credit of the economy was transferred in the hands of the developers. The real estate sector which has contributed by more than 15% of the economic growth rate is likely to face contraction. The slowdown that is experienced by China is appearing more cyclical as compared to structural (BBC, 2015). Figure 3: China real GDP The above figure represents that in 2005 the economy has been able to achieve its growth rate more than the targeted growth rate fixed by the government. But in 2015 the actual growth rate has become equal to the growth rate that has been targeted. Therefore adequate measures are required to be adopted restricting the further fall in the growth rate. The amendments the monetary and fiscal policy of the government has raised a matter of concern for the local government in terms of their spending. The economy is experiencing a consumer price inflation of 1.1%. But the Central bank is hesitating to ease the fiscal and monetary policy of the economy. Conclusion The financial system of China has improved for several years and it has performed efficiently for the rapid economic development of the nation. But it has experienced a slowdown in the 1st quarter of 2015. China is experiencing a growth rate of 7% in 2015 which is the weakest growth rate experienced by China since 2009. The government of China has expected to achieve a growth rate of 7% which is equal to the actual growth rate. Therefore the government and the Central bank are required to adopt adequate measures for preventing further decrease in the growth rate. In spite of the economic slowdown, China is being ranked as one of the fastest growing economies of the world. The economy of China is encountering an increase in debt due to the increase in the corporate borrowing. Therefore the government is required to ease its monetary and fiscal policy. References BBC. (2015). Chinas growth slows to 7% in the first quarter. Retrieved from: < http://www.bbc.com/news/business-32313557 > Magnier, M. (2015). China’s First-Quarter Growth Slowest in Six Years at 7%. Retrieved from: < http://www.wsj.com/articles/china-first-quarter-growth-slowest-in-six-years-at-7-1429064535 > Trading economics. (2015). China GDP annual growth rate. Retrieved from: < http://www.tradingeconomics.com/china/gdp-growth-annual > Xinhua, (2015). Chinas growth slows to 7% in Q1. China Daily. Retrieved from: < http://www.chinadaily.com.cn/business/chinadata/2015-04/15/content_20438086.htm > Yao, Kevin and Qing, K.G. (2015). China growth slowest in six years, more stimuli expected soon. Retrieved from: < http://www.reuters.com/article/2015/04/15/us-china-economy-gdp-idUSKBN0N52E220150415 > Read More